An Empirical Analysis on the Determinants of

Foreign Direct Investments in the Philippines

Montero, Paul Gian I.
Ramos, Mary Louise M.
4ECON2
0
500
1000
1500
2000
2500
3000
3500
FDI inflows (in millions of US$): 1981-2010
FDI inflows
0
50
100
150
200
250
300
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
Infrastructure Spending
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
Interest Rate
0.00
20.00
40.00
60.00
80.00
100.00
120.00
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
Population
0
50
100
150
200
250
300
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
Total Customs Duties
-50
0
50
100
150
200
250
300
350
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
Infrastructure Spending
Interest Rate
Population
Total Customs Duties
Foreign Direct Investment
Significance of the Study
See the impact of each independent variable
to foreign direct investments
Beneficial in projecting if and when foreign
direct investments increases or decreases
based on the model
Support the government in identifying the
role of each determinant especially in
adjusting the controllable variable:
infrastructure spending
Scope and Limitations
Four independent variables: infrastructure
spending, interest rate, population, total
customs duties (proxy variable for tariff rates)
23 years: 1990-2012
Comparative advantage of FDI among Asian
countries is not included
Conceptual Framework
FDI
Population
Interest
Rate
Customs
Duties
Infrastructure
Spending
Theoretical Framework
Irving Fishers Theory of Investment when the
rate of interest rises, to equate the marginal
efficient of investment, investment must decline
(negative relationship)
Institutional Theory high tariffs (imposed by
institutional forces) would discourage FDI
Increase of infrastructure spending would
encourage FDI (Khadaroo and Seetananah)
Increase of host countrys population would lead
to an increase in FDI (Chakrabati)
Problem Statement
1. Is there a relationship between foreign direct
investments and infrastructure expenditure?
2. Is there a relationship between foreign direct
investments and population?
3. Is there a relationship between foreign direct
investments and total customs duties?
4. Is there a relationship between foreign direct
investments and interest rate?
5. Is there a relationship between the four factors
(infrastructure expenditure, population, customs
duties, and interest rate) and foreign direct
investments?




Infrastructure Spending and FDI
Question: Is there a relationship between the
infrastructure spending in the Philippines and
foreign direct investments?
Hypothesis:
H
0
: There is no significant relationship
between FDI and Infrastructure Spending
H
1:
There is a significant relationship between
FDI and Infrastructure Spending

Results
Multiple Regression 0.441772
R-Square 0.195163
T-stat P-Value
Intercept 3.81 0.001014
Infrastructure
Spending
2.25 0.034817
Regression Equation
Y=994.33+6.16X
1

Results
Accept H
1
there is significant relationship
Positive coefficient direct relationship

Interest Rate and FDI
Question: Is there a relationship between
Interest Rate and Foreign Direct Investments?
Hypothesis:
H
0
: There is no significant relationship
between FDI and Interest Rate
H
1:
There is a significant relationship between
FDI and Interest Rate

Results
Multiple Regression 0.426002
R-Square 0.181477
T-stat P-value
Intercept 6.58 1.6E-06
Interest Rate -2.15 0.046278
Regression Equation Y=2043.05-112.239X
2

Results
Accept H
1
there is significant relationship
Negative coefficient inverse relationship
Total Customs Duties and FDI
Question: Is there a relationship between the
Total Customs Duties and Foreign Direct
Investments?
Hypothesis:
H
0
: There is no significant relationship
between FDI and Total Customs Duties
H
1:
There is a significant relationship between
FDI and Total Customs Duties

Results
Multiple Regression 0.48449
R Square 0.23473
T-stat P-value
Intercept 2.36 0.02776
Total Customs
Duties
-2.53 0.019138
Regression Equation Y=754.2742-5.2338X
3

Results
Accept H
1
there is significant relationship
Negative coefficient inverse relationship
Population and FDI
Question: Is there a relationship between
Population and Foreign Direct Investments?
Hypothesis:
H
0
: There is no significant relationship
between FDI and Population
H
1:
There is a significant relationship between
FDI and Population

Results
Multiple Regression 0.481876
R square 0.232204
T-stat P-value
Intercept -1.18807 0.248069
Population 2.520125 0.019893
Regression Equation Y=-1330.97+35.53482X
4

Results
Accept H
1
there is significant relationship
Positive coefficient direct relationship

Infrastructure Spending, IR, Custom
Duties, Population to FDI
Question: Is there a relationship between the
determinants and foreign direct investments?
Hypothesis:
H
0
: There is no significant relationship between
the determinants (Infra spending, Interest Rate,
Custom duties, Population) and FDI
H
1
: There is a significant relationship between all
the determinants (Infra spending, Interest Rate,
Custom duties, Population) and FDI

Results
Multiple Regression 0.64674
R Square 0.418273
Regression Equation Y=1216.707+1.05E-26X
1
-4.8E-10X
2
-1.9E-
26X
3
+4.66E-21X
4

T-stat P-value
Intercept 5.72 1.97E-05
Infra Spending 0.66 0.515221
Interest Rate -1.58 0.130426
Custom Duties -2.31 0.03267
Population 2.66 0.015935
Results
Independent variables were transformed raised
to 12
Infrastructure Spending not statistically
significant, positive relationship
Interest Rate not statistically significant,
negative relationship
Total Custom Duties statistically significant,
negative relationship
Population statistically significant, positive
relationship



CONCLUSION
Multiple regression results show that infrastructure
spending is insignificant and directly related to FDI,
interest rate is insignificant and inversely related to FDI,
total customs duties collected is significant and
negatively related to FDI, while population is significant
and directly related to FDI.
As infrastructure spending increases, FDI also
increases.
As interest rate rises, FDI decreases.
As total customs duties increases, FDI decreases.
As population increases, FDI also increases.
Recommendation
a deeper analysis of the study using more
additional factors, also use different proxy
variables for market size
microeconomic perspective is also recommended
with regards to the behavior of foreign investors
and multinational companies inside the country
use of other statistical tools and quantifying
methods
Use of quarterly data and increase duration scope
to increase r-square